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Rolls-Royce: what I’d do next after the AstraZeneca vaccine candidate data

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Around a month ago, I wrote about how three factors could affect Rolls-Royce (LSE: RR) stock. 

In the article, I wrote how the potential efficacy of vaccines for Covid-19, the number of pre-made vaccines approved, and how quickly vaccines are actually administered when they’re available could affect the stock. 

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Slightly more than a month later, it turns out many of the factors have seemingly ‘rolled’ Rolls-Royce’s way. 

In November, both Pfizer and Moderna’s vaccine candidates turned out to be around 95% effective according to interim data. With the recent AstraZeneca vaccine candidate data, there are now potentially at least three Western vaccine candidates that are being pre-made that have a shot at approval. 

AstraZeneca’s interim data shows its vaccine candidate is up to 90% effective in preventing Covid-19, depending on dosage levels. And it also comes at a low price with easier storage. That could make the distribution of AstraZeneca’s vaccine candidate easier than Pfizer and Moderna’s. 

With easier distribution, uptake could be higher and more people could become immunised faster.

Given all the events that have occurred, shares of Rolls-Royce have surged 29% over the past month when accounting for the share rights issue, according to Hargreaves Lansdown

With everything that’s happened, here’s what I’d do next. 

Rolls-Royce not a bargain anymore in the short term

Given the rally, I’m not as bullish on Rolls-Royce stock as I was before. 

I don’t really think RR is a bargain in terms of short-term fundamentals. The stock’s enterprise value, for example, is now close to what it was before the pandemic began. 

Meanwhile, it’s going to still take some time before RR’s fundamentals recover. Management has said in the past it expects to return to positive cash flow in the second half of 2021. I think demand for long-haul air travel could take longer than that to fully recover. 

In terms of what I’d do, if I owned it, I’d hold Rolls-Royce, despite it not being a short-term bargain anymore. I still like it for the long term due to the company’s competitive advantages and the secular growth in air travel. 

Stocks also don’t necessarily trade on fundamentals all the time. There are plenty of tech stocks that trade higher than their ‘intrinsic values’. Plenty of stocks arguably trade lower than what they should trade for as well. 

Data points I’d follow

In terms of data points, I’d follow certain future events, such as Rolls-Royce’s next earnings report and what management’s outlook is for the future. If the outlook is better than expected, I think RR’s sentiment could improve. I’d follow how much management can get for divested assets too.

I’d also follow other Covid-19 vaccine candidate data. In addition to what’s already been released, there are plenty more vaccine candidates that are in late stage trials that haven’t released their data yet. 

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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